Fearing that a recent Supreme Court judgement in a tax litigation will have far-reaching consequences on collections, the revenue department is contemplating the option of an amendment to the Income Tax Act.

The department is currently engaged in assessing the immediate revenue loss that it might incur, as well as the judgements impact on litigation with regards to taxation of services rendered by several other foreign firms for Indian companies.

The department is also examining the option of filing a review petition with the Supreme Court seeking a fresh hearing by a larger bench.

The department is examining the wider implications of the judgement and its implications on revenue collection, before deciding on the final course of action, official sources said.

The exercise has been initiated in the wake of the recent Supreme Court order, in the case of Ishikawajma-Harima Heavy Industries Ltd, which waived the tax liability on the multinational firm for payments received by the Indian counterpart for offshore supply of equipment and materials.

The order will have far-reaching effects on the taxation of payments made by Indian firms operating in India for the services rendered by foreign companies in their overseas projects.

Japanese firm Ishikawajma had entered into an agreement with Petronet LNG Ltd for receiving and degasification facility in Gujarat. The agreement included offshore supply and services, onshore supply and services, construction and erection work.

The Authority on Advance Rulings (AAR) had earlier ordered that the Japanese firm is liable to pay tax on the payments received by Petronet LNG for offshore supply of equipment and materials, even under the India-Japan Double Taxation Avoidance Treaty.

The AAR held that the supply of goods and rendition of service is attributable to turnkey projects in India. However, the Supreme Court held that these payments could not be taxed in India, since the transactions occurred outside the country.

The judgement has clarified that sufficient territorial nexus between rendering of the services and territorial limits of India is necessary to make offshore services taxable in India.

The entire contract would not be attributable to operations in India, since the test of residence is that of the tax payer and not that of the recipient of such services, said the order.

Further, the fact that a contract is signed in India does not matter if the activities (offshore supply) were outside India and therefore cannot be deemed to accrue or arise in India.

Besides turnkey projects in the infrastructure sector and project exports, the ruling may also affect an AAR judgement on the hospitality industry.

In the case of Luxembourg-based International Hotel Licensing Company the advertising and sales promotion firm for Marriott hotels the AAR had ruled that payments received by Indian arm of the hotel Marriott will be taxed in India, since the agreement was entered into in India and payments were received in India.

This ruling would have otherwise affected the sale and promotion activities of all hotel chains operating in India.